Publication of the "Israel’s Banking System" Annual Survey for 2017
In view of the changes in the banks’ operating environment, the Banking Supervision Department has been acting in recent years to reach additional goals alongside its continuing work to maintain the banks’ stability. Following the Global Financial Crisis, the Department has placed special emphasis on strengthening the banks’ stability and on implementing the insights gained from the Crisis. In the past three years, the Department has also emphasized the need to adjust the banks’ business models to the changing world of technology, while encouraging the assimilation of technology and innovation, improved efficiency, and increased competition. At the same time, the Department is adjusting the requirements to strengthen management of the large risks derived from the changing world of technology (cyber risks, business continuity, and information leakage), compliance risks, and the increasing risk in the field of household credit.
The banks’ results for 2017 and the beginning of 2018 show that the banking system is undergoing a deep change, and the goals being advanced by the Banking Supervision Department are already being reflected in the field. In addition to the continuing growth of capital and liquidity and the high quality of the credit portfolio:
· The banks are showing a continued improvement in their efficiency—as a result of reduced manpower, branches and real estate, and of changes in organizational structures and procedures, following a directive issued by the Banking Supervision Department and incentives that it provides for streamlining. The number of employees in the banking system declined in 2016–7 by about 3,200. These changes are not easy for the banks’ managements or employees—people who have contributed much to banking in recent decades—but they must be made so that the banks will be able to adjust their business models to the new technological-competitive world, and so that the customers will be able to receive more competitive service.
· The banks are investing in innovation and digital transformation in order to improve their service to the customers. In the past year, advanced payment applications and new and more convenient digital tools were offered for remote consumption of banking services. These provide customers with a means of responsible financial management, and allow them to save time (going to branches and waiting in line) as well as money. The banks have lowered fees for services provided through digital means, following a requirement published by the Banking Supervision Department that came into effect in November 2017. Some of the innovation is developed in cooperation with fintech companies.
· Retail banking competition is increasing, which is already being reflected in a number of aspects, chiefly in consumer credit. The number of alternatives open to the public has expanded, and consumers can already take out consumer credit from all banks—not just the bank where the customer’s current account is managed—as well as from credit card companies and other nonbank entities, some of which are new. As a result, the banks’ weight in the provision of consumer credit is declining, and today, about 20 percent of consumer credit is not taken from banks. In addition, competition between the mid-sized banks and the large banks is intensifying. There is lively competition over digital innovation, as a result of which service to the customer is improving, and competition in the payments area is also increasing, which is reflected in lower fees paid by business in the settlements area among other things. Competition in household and small enterprise banking is expected to continue intensifying in the coming years, based on technology and in view of large projects currently being advanced.
In addition to these major changes, the data show that in 2017 and the beginning of 2018, the banks continued to expand credit issued to the business sector, thereby supporting economic growth. They focused on small and medium enterprises, and expanded credit to construction and real estate (by about 10.5 percent), while credit to households grew at a slower pace than in previous years. The credit spreads in consumer credit and in credit to small businesses increased slightly in 2017, due to an increase in risk and credit losses in this area. In contrast, the interest rate on mortgages declined.
2017 was also characterized by an increase in dividend rates to shareholders of the banks, most of whom are among the broad public, and in an increase in the value of bank shares. In 2017, dividends increased the wealth of the broad public by NIS 1.6 billion. This development was made possible after the banks reached their capital adequacy targets set by the Banking Supervision Department, and this factor, alongside the transformation that the banking system is undergoing, contributed to a significant increase in the banks’ market value relative to book value (MV/BV), with the average value in the banking system reaching 0.96.
In terms of mortgages, an issue that concerns many households, the Banking Supervision Department took a number of steps intended to make it easier for borrowers. The Department enacted leniencies for mortgage borrowers in “Buyer’s Price” projects throughout the country by recognizing the assessor’s evaluation of the property value. The Department then further eased matters for mortgage borrowers in the periphery, deciding that State grants will be considered part of the customer’s equity. At the beginning of 2018, the Department made it easier for customers to take out mortgages with an LTV of between 60 and 75 percent, by lowering the banks’ capital requirement against such loans. In parallel, the mortgage interest rates for all these mortgages declined by about 0.5 percentage points over the course of the year.
The Banking Supervision Department handled significant banking issues that were bothering the public. The salaries of senior bank officials declined greatly as a result of the Senior Officials Wage Law, and it is now significantly lower than the wages of officers in public companies of similar size. Credit to large and leveraged borrowers declined significantly, and the banks internalized the lessons from the credit failures of such borrowers. Bank fees were lowered significantly in recent years, and banking service in general is now not as expensive as it was in the past or as it is in other countries. In addition, the lessons derived from the tax evasion investigations conducted against the banks by the American authorities were implemented. However, the investigations are still on-going in some cases, and once they are complete, the Banking Supervision Department will make sure that the implementation of the lessons is completed.
There were a number of issues that intensified during the year, which created difficulties for customers:
· The banks are imposing strict demands on customers concerning the opening of accounts, transfer of funds, and management of accounts with multiple beneficiaries, and are requiring them to present copious documentation. These demands are derived from legislative changes such as the inclusion of tax evasion as a predicate offense in the Prohibition of Money Laundering Law, and from the lessons derived from the American investigations—events that led the Banking Supervision Department to impose stricter requirements intended to ensure that the banks and their customers comply with foreign laws as well. It is important that the broad public understand that the legislative changes and the increased enforcement are the reasons for the banks to demand more information and documentation before making certain transactions, and that the banks have no interest in making it more difficult for the public make those transactions.
· The banks are closing branches and teller windows. In Israel, as in much of the rest of the world, a large portion of basic banking services are transitioning to direct means—ATMs, mobile applications, Internet, and telephone call centers—and customers come to the branches less often. This makes it necessary for the banks to reduce and reorganize their branch network, and some customers encounter this when the bank notifies them that the branch where they managed their account is closing and they are being moved to a different branch. Most customers get accustomed to the change quickly and see the advantages involved. But there are customers, mainly senior citizens, who have difficulty getting accustomed to the change, and the Banking Supervision Department is therefore guiding the process in order to minimize the difficulties. It is requiring the banks to take measures in order to make it easier for customers with low digital literacy—placing ushers in the branches to help customers use digital tools, holding methodical training programs, operating mobile bank branches that come to seniors’ residences, and more. In 2018, the Department, in conjunction with the Association of Banks, will lead a national initiative intended to provide digital education to senior citizens.
In the coming year, the Banking Supervision Department will continue to advance the following goals:
Further streamlining of the banks: The Banking Supervision Department will continue to monitor the implementation of streamlining programs, and will require the banks to adjust to the changing environment, including through wage agreements that are being formulated.
Adjusting the business model to the new technological environment: The Banking Supervision Department will continue incentivizing the adjustment, and will promote digital transformation and automation both within the banks (in their operating systems, service, and risk management and control) and in their interface with customers.
Increasing competition: The Banking Supervision Department will continue encouraging the many initiatives in the field. Chiefly, it will guide the process of separating two credit card companies from the banks, and will support their solidification as competitive independent actors. It will also promote “open banking” through the publication of an API standard, which will enable customers to transfer information and compare alternatives. Competition will also be encouraged by the credit data sharing system currently being established by the Bank of Israel. The Banking Supervision Department will advance all of these tasks while conducting on-going examinations, maintaining stability, and continuing to require the banks to strengthen their management of the new and intensifying risks.
In order to deal with the large changes in their operating environment, and with the aim of ensuring the existence of a stable and competitive banking system over time to benefit the broad public, the banks and bankers must continue to act to adjust their business models decisively and with a forward-looking vision, by assimilating innovation to benefit the customers and in order to streamline internal processes, continued significant streamlining and adjustment of existing labor agreements, and increasing their competitive ability. Banks that implement the changes slowly and continue to operate along traditional methods will increase their risk of becoming uncompetitive and irrelevant in the not-too-distant future.